HW English

Emptying the RBI Coffers

As the banking regulator and the banker to banks and to the government, the primary sources of the Reserve Bank’s income, are interest on foreign reserves invested in overseas and domestic securities, lending to banks and currency management. Over the years, the RBI has accumulated reserves of Rs. 9.6 lac crores, of which Rs. 6.91 lac crores is on account of revaluation of its foreign currency and gold portfolios, which is a notional book profit and not a realised actual one and Rs. 2.32 lac crores by way of contingency reserves, to meet any crisis in the banking/currency markets and ensure their stability. These reserves have been built over the years, after paying a hefty dividend to the government each year. Last year the RBI paid a huge dividend of Rs. 68,000 cr. to the government. In fact most of the real actual income of the RBI is transferred as dividend to the government and not the notional income arising on account of revaluation. These reserves add to the financial strength, stability and credibility of the RBI and are one of the factors that influence and give the investment grade sovereign rating to India. The government has budgeted to receive a dividend of Rs. 1.06 lac crores, from the Reserve Bank this year.

It is these accumulated reserves of the RBI, that the revenue and cash starved government has been eyeing and has been a matter of raging controversy between the RBI and the government. It was this fierce debate, which was one of the reasons, that led to the resignation of Dr. Urjit Patel, as the RBI governor in December 2018, unable and unwilling to face the unrelenting pressure from the government. It led to the appointment of a more amenable RBI governor, who expectedly promptly handed over an interim dividend of Rs. 20,000 cr. to the government, after his appointment. The Reserve Bank also then appointed a six member panel, headed by its former governor Mr. Bimal Jalan, to suggest an Economic Capital Framework (ECF), under which it should be decided as to what should be the maximum reserves that the RBI should have, such that the surplus thereafter can be transferred to the government, as a routine institutional mechanism, without a debate. This is not the first time that such a panel has been set up by the Reserve Bank, since every other government, including the one headed by Rajiv Gandhi, has been seeking to encroach upon the RBI reserves. The last one was headed by an eminent CA Mr. Y. H. Malegam and was set up in 2013, but curiously it failed to recommend the formula or the quantum of maximum reserves that the RBI should have. The controversy has thus continued and whenever there has been a strong government at the Centre, as we see now, the Reserve Bank has come under pressure to part with its money.

The reports say that the Bimal Jalan panel has finalised its report, which will be submitted to the government in about a fortnight. While it is not clear as to what is the quantum that it recommends be transferred to the government, it has suggested that the RBI reserves be handed over to the government in staggered tranches over a period of 3-5 years time. It has recommended the transfer of both the contingency as well as the revaluation reserves of the RBI to the government, thus supporting the government’s primary contention that the RBI is too conservative and is sitting on excess reserves that must be transferred to the government. The government claims that it will put such surplus funds of the RBI to more productive use, which is not quite true, since the government desperately needs funds to meet its fiscal deficit target, arising primarily on account of revenue expenditure. Interestingly the Finance Secretary Mr. S. C. Garg, who is a member of this panel, has put in a dissent note, demanding a full transfer of reserves in one single payment.

It is pertinent to note that revaluation reserves of the RBI, do not represent genuine realised profits and are merely notional gains. These cannot be taken as income that can be spent. These reserves are like the unrealised gains, due to rise in the prices of the house that you reside in. That’s an increase in your wealth and not your income and does not give rise to a fund that can be spent. Even the income tax law does not tax such notional gains. Thus no transfer of funds representing revaluation reserves can be done by the RBI and if that is done, we are weakening the financial position and international standing of the RBI. Incidentally the fund hungry government is also eyeing the reserves of SEBI, which it is reluctant to give, since it would erode the financial autonomy of SEBI and make it more open to government interference, which certainly suits the government.


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